Gone are the days of the Federal Reserve mapping out its policy prescriptions well ahead of time. (They even used to have neat dot plots and charts.) These days, the Fed’s guidance is far more shrouded in ambiguity and potential misdirection, so I suppose we can hardly blame the “experts” for failing so miserably to accurately gauge what direction the Fed and other central banks are going.
The analysts who earn their paychecks by telling us what central banks will be doing in the near future have had a rough go of it this year. At least in part, it’s really not their fault. Its been an exceedingly dynamic year for global monetary policy. More so than any other time in recent memory, central banks have not only departed from their stated policy goals but have widely diverged from one another.
For instance, central monetary authorities like the Federal Reserve in the U.S. and the Bank of England in the U.K. have yet to raise rates one iota after months of declaring time and again that they fully intended to do so. As economic conditions improved, benchmark interest rates were surely going to lift-off. Well, conditions have been stagnant and rates have gone nowhere. The Bank of England’s Monetary Policy Committee has even dimmed its expectations about whether or not rates will go up at any point in 2016, either.
On the other end of the spectrum, several major economic powers have been forced to ease monetary policy even further than analysts expected, as both the People’s Bank of China and the European Central Bank have instituted still more stimulus and monetary easing. China has even cut its benchmark interest rates six different times over the last year.
With these central banks all reacting to seemingly unexpected macroeconomic conditions, the experts have been wrong 71% of the time so far this year.
Fed Chair Yellen was grilled by congressional committees on Wednesday and Thursday over the transparency (or apparent lack thereof) and over-management of the economy by the Fed. Even in the face of some sharp barbs by the members of Congress who questioned her, Yellen continued to reiterate her belief that, so long as the economy remains on a path of steady improvement, rates should rise in the very near future. Economists now see a 60% chance of an interest rate hike coming in December, especially after New York Fed President William Dudley and Fed Vice Chair Stanley Fischer each seconded Yellen’s remarks.
The strangest part of Yellen’s congressional hearings may have been when one lawmaker, Representative Brad Sherman (D-California), even invoked nature and the divine as preferring a delay in a rate lift-off. He warned her,
“God’s plan is not for things to rise in the autumn, as a matter of fact, that’s why we call it fall, nor is it God’s plan for things to rise in the winter, through the snow.
“God’s plan is that things rise in the spring. And so if you want to be good with the Almighty, you might want to delay until May.”
It would seem the markets have contracted a case of Fed-itis, and are jumpy any time central banks issue some sort of statement. After Yellen, Dudley, and Fischer all commented about December being “live” for a possible rate hike, global bonds plummeted. Notably, the 10-year Treasury yield spiked to 2.25%.
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